BLOCKCHAIN FOR AML
Harnessing Blockchain technology to detect and prevent money laundering
Blockchain-based system using smart contracts (with in-built algorithms) Distributed ledger for regulatory oversight & inter-institution collaboration Tamper-Proof records for current assessment and future analysis
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The global impact of money laundering is staggering; with related transactions estimated at 2 to 5% of global GDP Every year money laundering channels around $2 trillion worth of proceeds from various illicit activities. Less than 1% of global illicit financial flows are currently seized by authorities
36% of organisations report being victimised by economic crime
Fraudulent Compliance-related Rising visibility misinvoicing of expenditures have linking money trade transactions risen by more than laundering to global is a key component 50% over the last terrorism financing, of illicit fin. flows three years trafficking, etc
Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to crime, corruption, and tax evasion— more than these countries receive in foreign direct investment and foreign aid combined Source: UNODC, IMF, Global Financial Integrity, Accenture, KPMG
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Aging AML solutions are inadequate to meet today’s business challenges and unprepared for tomorrow’s needs Existing transaction monitoring systems, based on traditional technology, are unable to keep pace with growing data sources, volume and complexity of transactions
Growing wave of new digital financial services and cryptocurreies Silo’d programs with very limited inter-institution collaboration
Lack of smart automation, analytical capability and visualization
Absence of integrated planning and data management
Despite spending billions of dollars on AML solutions, financial institutions and regulators continue to face an uphill battle in the fight against money laundering
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Blockchain technology, by its very nature, lends itself to integrated decentralized monitoring efforts of financial transactions The blockchain, a cryptographic ledger comprising of a digital log of transactions shared across a public or private network, can address many of the pitfalls of existing transaction monitoring systems The first electronic value transfer protocol
Key features of Blockchain technology Blockchain
Open source value transfer protocol
Distributed P2P network
Secure math-based system
Decentralized Cryptographically Immutable Secure
Consensus driven
How a blockchain works
A wants to send money to B
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The transaction is represented online as a `block’
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The block is broadcast to every party in the network
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Those in the network approve the transaction is valid
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The block that can be added to the chain, which provides an indelible and transparent record of transactions
The money moves from A to B
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While blockchain technology is today predominantly being used within the ‘fintech’ context , organizations - both public and privateare starting to look at use cases beyond financial services NGT Ventures LLP
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A Blockchain-based system with smart contracts (using in-built algorithms) can help identify and stop suspicious transactions The distributed system will allow financial institutions to securely parse data through an AML/TFML engine on the blockchain; with the automation providing high efficiency and ensuring minimum friction
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Central Bank
Regulator & N/W Mgmt.
Monitor, Analyze
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3 AML App & Blockchain Node
AML App & Blockchain Node
Input subset of transactions
Alert, Record
Bank B
Bank A Input data. Invoke smart contract
Transaction/payments Customer profile data Patterns Other details
AML App + Blockchain Node
Private Permissioned Blockchain Network Network Directory & AMLSmart Contracts
AML App & Blockchain Node
Bank / Fin. Exchange
AML App & Blockchain Node
AML App & Blockchain Node
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• Alert stakeholders • Flag and stop payments • Record/Log Details
Automated, quick and effective Improved accuracy Immutable logs and audit trail
Bank / Clearing House
A Blockchain-based platform will give regulators, auditors and other stakeholders an effective and powerful set of tools to monitor complex transactions and immutably record the audit trail of suspicious transaction across the system NGT Ventures LLP
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The decentralized system will compliment existing AML applications adding an extra ring of scrutiny & visibility The distributed ledger based platform will allow one institutional system to alert another of transactions that could potentially be fraudulent and require further scrutiny
Node
Blockchain Network
Node
Node
Key Features * 1. Private Permissioned Blockchain network 2. Distinct roles for banks, regulators, exchanges and other users 3. Distributed system for confidentiality, resiliency, and scalability * Adapted. Based on the Hyperledger Fabric Blockchain
Ledger
Banks Other Financial Institutions
Node
Node
Ledger
Input transaction. Invoke contracts
Ledger of Records
Ledger
Regulators Central Bank Other auditors
Node
Ledger
Ledger
Define contracts. Monitor transaction
Ledger
Blockchain N/W Management
4. Cryptographically secure – encryption/decryption for visibility to only entities linked to a transaction and authorized auditors/regulators 5. Auditing at multiple levels. 6. Logs immutably recorded, providing a single version of the truth with a complete audit trail of (suspicious) transaction across the system
Being cryptographic-ally secure will ensure credibility while the immutability feature of Blockchains will maintain tamper-proof records for current assessment as well as future analysis NGT Ventures LLP
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The Result: A next-gen AML solution ready for today’s complex financial environment and tomorrow’s evolving needs
Highly effective monitoring of suspicious transactions reducing the large number of false positives with minimum friction
Integrated allowing one institution’s system to alert another of suspicious transactions
Distributed for scalability and resilience - to keep pace with the growing data sources, volume and complexity of transactions
Immutable & Tamper-Proof logs - stored securely on the Blockchain for current assessment and future analysis
Additionally, the blockchain-based system will also provide an ultra-secure platform for information sharing among the participating institutions NGT Ventures LLP
Institutions have the potential to leap-frog peers and lead the way in smartly detecting and preventing money laundering
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A 5-Step Methodology to explore the potential of Blockchain technology for AML/TFML
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Understand application of Blockchain tech. for AML Secure exec sponsorship.
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Setup a working group Validate hypothesis Design PoC engagement
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Select and onboard PoC participants Kick-off project
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Develop prototype application Test use cases.
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Review PoC Evaluate options Move to mainstream deployment (in a phased approach)
Guiding principles: Set up a lab-like environment. Start small. Begin with a few select processes that can be showcased to a wider audience to highlight benefits and prime adoption. Secure alignment. Press for cross-industry participation - Central Bank, Regulator, Banks, Intermediaries like clearing houses, etc A consortia-based approach can accelerate the integration with key existing systems as well as the rollout across participants A structured approach will help organizations to swiftly explore possibilities, experiment with the technology and develop innovative blockchain-based solutions, in a cost effective way NGT Ventures LLP
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Learn how you can harness Blockchain technology to detect and prevent money laundering Drop us a line or reach us via any of the channels below:
www.blockchainworx.com
info@blockchainworx.com
Reach Us
+91 9820386446 +65 96536243
@blockchainworx
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